It’s the beginning of a new quarter, and that means earnings season is upon us.
And one expert says that earnings could turn the market into a “minefield” as companies begin to feel the pressure of a slowing global economy, the ongoing trade war, and weakening economic data.
“You’re going to have some companies that deliver and they’re going to get rewarded,” said Peter Boockvar, chief investment officer at Bleakley Financial Group. “But if you’re a big multinational company that has exposure in Asia and Europe and Latin America and certainly in the U.S., it’s going to be hard to manage this.”
For Boockvar, companies “better come through,” even as revenue growth slows and profit margins recede, if they hope to make it through the widespread pain that’s beginning to grip the global economy.
So far, things aren’t looking great. While earnings season officially begins on October 15, when big banks begin to report their results, we’ve seen recent reports from the likes of Carnival Cruise Line (NYSE: CCL) and FedEx (NYSE: FDX) and both have come with some red flags.
Carnival reported last week, and the stock has been taking on water ever since. While the cruise company beat estimates with earnings per share of $2.63 on revenue of $6.53—compared to analyst expectations of earnings per share of $2.53 on revenue of $6.16 billion—it also lowered its guidance for the year.
“Due to an $0.08 impact from the recent spike in fuel prices caused by geopolitical events, we are reducing our full year guidance for 2019 by $0.05 per share,” said Carnival president and CEO Arnold Donald.
With that, Carnival’s earnings per share range goes from between $4.25 to $4.35, to a range of between $4.23 to $4.27. Unfortunately, even at the high end of this updated range, the company would come in below Wall Street’s earnings per share estimate of $4.33 for this fiscal year.
What’s also disappointing is that this guidance adjustment marks the third revision in just six months.
“While [Carnival] did cite a strong dollar [and] higher oil prices” as cause for the pain that’s led the company to adjust its guidance, “they also talked about softness in Europe and Asia,” two key markets, Boockvar said.
And then there’s FedEx.
The shipping giant reported two weeks ago and has been falling ever since. FedEx fell short of expectations, reporting revenue for the quarter of $17.05 billion compared to estimates of $17.06 billion. It also lowered its full-year guidance and now projects earnings between $10 and $12 per diluted share.
“Our performance continues to be negatively impacted by a weakening global macro environment driven by increasing trade tensions and policy uncertainty. Despite these challengers, were are positioning FedEx to leverage future growth opportunities as we continue the integration of TNT Express, enhance FedEx Ground residential delivery capabilities and modernize the FedEx Express air fleet and hub operations,” said chairman and CEO Fred Smith.
“The global economy continues to soften and we are taking steps to cut capacity,” Smith said in a conference call to discuss the earnings report. And the slowdown is being “driven by increasing trade tensions and policy uncertainty.”
For Boockvar, FedEx’s troubles represent a larger issue.
“We saw FedEx a couple of weeks ago, and while some of FedEx’s issues are company specific, I think its a great bellwether for its… supply chains around the world, and what they say about the macro environment I think is very important.”
Boockvar, who recommends gold, silver, and value stocks for investors looking to stay afloat in this difficult climate, doesn’t see much break ahead amid the slowing of the global economy even for those companies that don’t have international market exposure.
“They’re not going to be immune,” Boockvar said. “If you’re a restaurant company that’s focused in the U.S. but you have restaurants that are near manufacturing facilities or transportation facilities, you’re going to still feel the impact. While maybe they do better than some of the multinationals because U.S. growth is better than what we’re seeing overseas, they’re certainly not immune, and I do think they’re now beginning to get impacted.”
What’s more, Boockvar says that what investors see as a “Fed put”—or the ability of the Fed to help the economy along with monetary policy should it see a sustained decline—isn’t as much of a sure thing as the market may think.
“I think the reason why the S&P is around 3,000 is because people still think that it’s somehow embedded in the market,” Boockvar said. “But… understand that when you are in an already very low-rate environment, further easing by your central bank is not going to stimulate any more growth, as we’re seeing in Japan and Europe. … I just happen to think that people are going to wake up one day and realize that that put is not effective anymore.”
But it’s not all bad news. Boockvar says that the market’s shift from growth stocks into value names may continue for a while longer.
“This growth-to-value shift is not just a one or two week thing,” he said. “I do think that this is a change in the market’s attitude towards high valuations, and it really has started in the IPO market. It started with Lyft (NASDAQ: LYFT), and then with Uber (NYSE: UBER), and then with WeWork, and maybe… with Peloton (NASDAQ: PTON), that there is a valuation rethink. Therefore, value stocks… that have already embedded very low expectations I think will outperform.”